*Story by Winston Hines

I wound up early on in the COVID pandemic working on the negotiation of some modifications of leases (and one owner financed private mortgage) for adult club owners. For the most part things went well, and most landlords were amenable to working with their tenants due to the extraordinary nature of what was and still is happening.

At the risk of sounding like a broken record, let me repeat again: get and/or stay on the good side of your relationship with your landlord, whether it is an individual, a property manager, or some regional or nation property owner. Stay in communication of what is going on in your business life!

And at some point, on a leasehold, you, the operator, are going to be looking at a renewal, an extension, maybe a de novo lease on a business acquisition, or some other situation. There is an old saying, attributed to Ben Franklin, “By failing to prepare, you are preparing to fail.” I recently came across a set of possible clauses to use in your lease to cover you in the event of this or another COVID catastrophe (courtesy of the CCIM network of which I am a candidate).

Make sure you are covered either in your existing lease or any future lease agreement or addendum. Below are the most recent wordings and clauses you need to look at to incorporate on that lease. These clauses are each different, with different effects, and I strongly urge you to speak to/work with your attorney to make sure you get the right result you want.

“In the event, during any term of the Lease, that the local, state, or federal government shall issue a mandated shut down of businesses, or require business to decrease occupancy of the business, Tenant shall only be required to reimburse Landlord for Landlord paid operating expenses for the Premises with no other penalties or fees until such time the mandate is lifted.”

Pandemic Clause: “In the event of National/State/Local Emergency, with a governmental mandated closure of Lessee’s business, rent will be deferred abated for the duration of the business closure plus an additional 7 days. The deferred rent shall be paid to Lessor over the twelve month period immediately following the lifting of the governmental business closure in addition to normal rent due under this Lease.”

“If the Lessor or the Lessee is delayed, hindered, or prevented from performing any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive government laws or regulations, riots, terrorist attacks, insurrection, the act, failure to act or default of the other party, war, or other reason beyond its control, then performance of the act shall be excused for the period of delay. In that event, the period for the performance of the act shall be extended for a period equivalent to the period of the delay.”

“Notwithstanding the foregoing, in the event that: (i) any governmental authority having jurisdiction over Tenant’s use of the Premises requires Tenant to cease all business operations from the Premises due to the COVID-19 pandemic (“Order”), and (ii) Tenant does cease all such operations from the Premises as a result of, and for the duration of, such Order then GMMR shall be abated for the number of days in which Tenant was required to be closed. Tenant shall at all times remain fully responsible for all timely payments of Additional Rental due under this Lease, and there shall be no abatement thereof. For the avoidance of doubt, as of the Effective Date, no Order is in place.”

As a business broker, when I am working with a seller, one of the first items i try to get is a copy of the lease to see where the landlord and the tenant stand, possible biases in the lease, the length of time remaining, the mechanism for extensions or successive periods, and on and on. There are a lot of moving parts in a commercial lease, and although there are a lot of “boiler plate” clauses that are pretty much the same wherever you are, every jurisdiction can be just a little bit different.

For example, in the Carolinas, one state has “grandfathering” and one does not—think that may have an effect on how a lease can be drawn up for an adult club? Now with COVID, there’s one more item to look for, to check on, to consider when weighing the strength or weaknesses of a lease in relation to value of the business.

In working with a buyer of an adult club with a lease, now that buyer has a very significant reason to negotiate the lease keeping in mind these “sample” clauses above.  Also keep this in mind: the failure to address (or add) a COVID clause in a new lease, or addendum, may be considered, since both parties are now aware of the impact of a COVID crisis, to work against the tenant. Bottom line, make sure your attorney has signed off on any lease. COVID clauses will now pretty much join all the other “boiler plate” clauses in a commercial lease.

(By the way, a lot of above may also be applicable to either private mortgages or even lender-based mortgages.)

No matter how many times I hear, “Me and the landlord, we got that all talked out and we’re good to go,” I still cringe. A lease is a lease is lease is a legal document. Get it in writing worked out through your attorney, or at the minimum, mention any new arrangement or agreement in an email to your landlord and BCC a copy to your attorney.

Holler at me at updaze@aol.com or call me (864) 580-3826 if you have questions.

Thanks for reading, now go wash you hands and wear that mask!

See you in October at Booth 27 at the Expo.

EXPO deal 1